Cash flow: what it is, the three types and how to calculate it

Cash flow is the difference between the money coming into a company and the money going out over a period. It is a picture of cash in motion: how much was actually collected from customers and how much was paid to suppliers, salaries, taxes and investments, with no promises and no amounts that were merely recorded.

Unlike accounting figures, cash flow looks only at what passed through the bank account. That is why it is called the pulse of the business: a company can have signed contracts and issued invoices, but what pays this month bills is the cash that already arrived. Inflows larger than outflows produce positive cash flow; the reverse, negative cash flow.

Cash flow splits into three blocks that, together, form the cash flow statement:

• Operating: cash generated or consumed by the core activity, such as collecting from subscribers and paying salaries, servers and commissions.
• Investing: inflows and outflows tied to long-term assets, such as buying equipment, acquiring a company or investing in securities.
• Financing: capital movements with owners and lenders, such as investor funding, loans, debt repayment and dividends.

Adding the three gives the total change in cash for the period. Operating cash minus investment in assets shows what truly remains, the basis of free cash flow.

Profit and cash look like the same thing, but they are not. Profit comes from accrual accounting, which recognizes revenue when it is earned and expense when it is incurred, regardless of when the money moves. Cash follows cash accounting: it counts only when the amount actually comes in or goes out.

That is why a company can be profitable on paper and still run out of money, if it sells on credit and collects late, or the opposite, sit on plenty of cash with little profit. The gap between recognized revenue and money received is what makes "profit is not cash" one of the warnings most repeated by firms like McKinsey.

In SaaS, an annual contract paid in advance brings in twelve months of cash at once, while revenue is recognized month by month. The money arrives today, but the revenue is booked over the year, and the part not yet recognized sits as deferred revenue on the liabilities side.

This mismatch is a working capital advantage: the company collects before it delivers and uses that cash to fund its own growth, without taking on debt. Billing annually instead of monthly improves cash even with the same recognized revenue, and it is one reason so many SaaS offer a discount on the annual plan.

The base calculation is direct: cash flow = inflows - outflows over the period. Add up everything that came in (customer payments, funding, loans) and subtract everything that went out (suppliers, payroll, taxes, investments).

• Positive cash flow: more came in than went out, cash grew.
• Negative cash flow: more went out than came in, cash shrank.
• Realized cash flow: what actually happened, as opposed to what was projected.

Example: if in one month $120k came in and $90k went out, cash flow for the period was $30k positive. Projecting that number for the coming months is what lets you spot a squeeze before it arrives.

No company fails for lack of paper profit; it fails when the cash runs out. That is why cash flow is the basis of survival metrics: burn rate measures how fast cash is consumed, and runway tells how many months it will last.

Reading cash flow often reshapes decisions: when to hire, when to hold an investment, when to raise. Firms like McKinsey have long summed up the idea with the maxim that cash is king. For a SaaS, tracking cash side by side with recurring revenue is what separates growing with room to breathe from growing in the red.